Sabah: A competitive landscape

The banking sector in Sabah – already well-managed and capitalised – seems poised for a positive performance in 2011, but consumers will also benefit from an increase in competition. With strong economic fundamentals in place on the back of high crude palm oil (CPO) prices (which tend to broadly track those of regular crude oil) and a burgeoning local tourism sector, Sabah’s financial services market is attracting growing interest from foreign players.

On March 7, the local press reported that the Malaysian subsidiary of Singapore’s United Overseas Bank (UOB) was in the process of building up its presence in Sabah, in part by equipping its local staff with the skills to reach out to new clients. UOB officials said that they aimed to capitalise on the significant pool of wealthy Sabah residents, including ethnic Chinese. As a foreign-owned bank – it is Singapore’s third-largest – UOM faces greater restraints on branch expansion than its domestic counterparts. However, Kevin Lam, UOB Malaysia’s senior vice-president and head of personal financial services, asserts that with the increasing sophistication of online banking products, branch expansion is no longer a necessity for growth.

Sabah’s financial services sector offers both substantial opportunities and a number of challenges for domestic and foreign institutions alike. Malaysia’s banking sector weathered the global economic downturn well, having been reinforced and revamped in the aftermath of the 1997-98 Asian financial crisis. With a generally positive economic outlook amidst a return to solid growth across most of the region, industry leaders are upbeat.

Lending increased in 2010, as did deposits, which have benefitted from rising incomes and high international prices for CPO, one of the state’s most important GDP contributors. This year, the market environment is expected to improve further, due to several factors. As a number of government infrastructure projects launch, the firms that win contracts will seek financing. More generally, such government investment should also feed through into the wider economy, helping local businesses and perhaps public sector departments.

The CPO price outlook is also positive, given demand and forecasts that the crude oil price is unlikely to fall over the year – and indeed has risen significantly over the past few weeks. Expansion of CPO capacity, including in palm oil industrial clusters (POICs), may also provide opportunities for financing, with the caveat that many plantation companies have ample capital and less need for borrowing than other sectors.

The tourism sector, widely perceived as Sabah’s growth industry, is another source of optimism. Sabah is central to Malaysia’s long-term policy of developing high-end, eco-friendly tourism and capitalising on its natural environment. The state’s wildlife, mountains, beaches, islands and dive sites make it an archetype of the tourist destination image that Malaysia would like to project. Sabah has something of a shortage of high-end hotel rooms, and investments in hotel and resort developments present potential opportunities for lending.

Sabah’s sharia-compliant finance market has grown impressively over recent years, even among the large non-Muslim population, given the fact that the returns are often higher than those of conventional products. Malaysia is marketing itself as one of the world’s leading Islamic finance centres. While the range of products available in Sabah is not always as wide as in West Malaysia – sukuk, or Islamic bonds, are in relatively early days here – the scope for growth is impressive.

While the opportunities are considerable, Sabah’s financial services market is already quite competitive. There are approximately 15 financial institutions offering services in Sabah, including some domestic, regional and international leaders, as well as an increasingly sophisticated and demanding client base for both loans and deposits. Customers regularly rotate funds among different banks to take advantage of better rates and do the same with plastic, although a new RM50 ($16.49) tax on credit cards has somewhat discouraged the latter phenomenon.

Interest margins have narrowed as banks struggle to attract customers by increasing deposit rates. To prevent further tightening, many financial institutions are now seeking to compete on service and special offers to encourage take-up and greater use of savings and current accounts. In addition, Bank Negara Malaysia, the country’s central bank, looks likely to raise rates to head off inflationary risk, which should increase the appeal of deposits. Nonetheless, many higher-net-worth individuals, most notably the increasingly cash-rich planters, have preferred to invest in real estate, such as condominiums, even if it sits unused.

Human resources are also an issue. The best employees are often willing to change jobs for a better offer, and there is a perception that the most able go to West Malaysia, where many banks have centralised their operations. Local branches of banks such as CIMB, a Malaysian firm, are trying to address this by enhancing benefits packages and by working with universities to encourage bright young people to join the financial sector. This should go some way towards mitigating the issue, but Kuala Lumpur is likely to remain the country’s banking capital for the foreseeable future.

For the consumer, whether corporate or individual, competition has improved interest rates and services, with this good news for Sabah’s growing economy. While market dynamics require banks to sharpen their strategies and be well aware of downside risks, overall a positive attitude among market participants seems well justified.